Least cost emission reductions
There seems plenty of evidence that human induced climate change is
occurring. If the concentration of greenhouse gases in the atmosphere
continues to increase for the next few decades it seems highly likely there will
be significant changes to climate, sea level, and many other features. Those
changes are expected to bring more global costs than benefits and for many
low lying regions the impacts are likely to be catastrophic.
I recently tried to persuade some colleagues that human induced climate
change is no longer controversial, and it is response to climate change where
there is heated debate. My colleagues judged that statement was far too rash
for public consumption and it was deleted from the document we were
working on. There is plenty of debate over response to climate change, and
particularly over attempts to achieve emissions reductions, and that is not
surprising in New Zealand for few countries have made as big a mess of
response to climate change as has New Zealand. For a decade political
parties competed to offer ever grander emission reduction targets until New
Zealand’s representatives agreed at Kyoto that our emissions during the
2008-2012 commitment period would not exceed 5 times our 1990 level
emissions. In 2008 the folly of that decision is starkly obvious as New
Zealand’s emissions are running 25+% above 1990 levels and there is little
prospect of any meaningful reduction occurring before 2012. If New Zealand
honours its Kyoto commitment, purchase of carbon credits may cost more
than $1 billion.
The actions that nations choose to take in response to climate change and to
meet Kyoto or subsequent commitments differ in their costs. The costs of
climate change response can be compared to the benefits expected to flow
from those actions. Responding to climate change seems certain to impose
costs on nations as soon as their actions commence. A nation taking strong
early action to reduce greenhouse gas emissions needs to consider the
benefits and the costs from those actions. New Zealand may be less at risk
from climate change than most countries and may benefit only slightly from
climate change policies introduced here and in other countries.
A crucial factor influencing the benefit cost ratio for climate change responses
is the ease with which nations can reduce or offset their greenhouse gas
emissions. New Zealand is heavily reliant on transport systems, agriculture
and renewable energy sources. Improvements in energy efficiency, changes
to farming and processing practices, more use of renewable energy (and less
use of coal and gas), more carbon sequestration in growing forests, use of
cement extenders or fillers in cement manufacturing, new cement
manufacturing factories or changes in many other production systems are all
possible with appropriate investments. Payoff from those actions will bring
some local benefit - reduced energy costs, maybe reduced production costs and global benefits of reduced climate change some years hence and
stretching for decades, even centuries into the future.
Choice of discount rate is a key factor influencing whether the present value
of the benefits from lessened climate change will exceed the present value of
the costs of halting or reducing the rate of climate change. There is no
consensus within economics over the appropriate discount rate to use in
evaluation of long term environmental projects (Weitzman 2007). But a small
country that is heavily reliant on international borrowing, and has a volatile
exchange rate, does not have a low discount rate. In summary, strong action
within New Zealand responding to climate change will bring more costs than
benefits. Powerful arguments need to be advanced why New Zealand should
agree to a stringent post 2012 emissions target.
Whatever the climate change targets that are established and pursued, an
issue for nations and for the global community to focus on is can least cost
ways to achieve the chosen emissions target be identified and employed?
Even if there is continuing debate over the benefits to New Zealand and to the
global community of pursuing emissions reduction target surely it’s rational to
pursue a target using the most cost effective ways available.
Which policies or incentives are needed to ensure least cost emissions
reduction or sequestration occurs? Widely and consistently applied charges
for greenhouse gas emissions, and payments for greenhouse gas
sequestration, will provide incentive to search for least cost ways to reduce or
sequester emissions. Negotiators striving to develop post 2012 climate
change targets and mechanisms need to be single minded in their pursuit of
that goal.
The Kyoto Accord was cognizant of this point, and beyond the borders of
Annex I countries the Clean Development Mechanism provides a means to
pursue low cost climate change actions. But the remarkable divergence of
petrol prices around the world at mid-year 2008 (6 cents per litre in
Venezuela, 92 cents in China, $1.25 in USA, $2.01 in New Zealand, $2.89 in
Germany, $6.08 per litre in Sierra Leone), the absence of payments for
carbon sequestration in tropical forests, the opposition to inclusion of the
largest emitters in climate change action, and the absence of taxes on
aviation fuel, all illustrate just how far away we are from policies and signals
that will deliver least cost responses to climate change.
Reference
Weitzman, M. 2007. The Stern Review of the economics of climate change.
http://www.economics.harvard.edu/faculty/weitzman/files/JELSternReport.pdf